9 Ways To Prepare Financially for Unexpected Life Events During Retirement
Written by
Jordan Rosenfeld
Edited by
Levi Leidy
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No matter how much you may think you have prepared for all eventualities in retirement, life has a funny way of surprising you.
While you can’t always get ahead of things such as health scares and other life changes, you can be financially prepared so that you can tackle these problems without also struggling to figure out how to pay for them.
Financial advisors explain the best ways to be financially prepared for the things you don’t quite see coming in your golden years.
Consider Longevity Risk
One of the biggest risks retirees are going to face is longevity risk — the risk of outliving your assets, according to Melissa Murphy Pavone, CFP and director of investments at Oppenheimer & Co. Inc.
“With the advances in medicine and technology people are living longer,” she said. “One out of four 65-year-old men of average health will live to age 93. One out of four 65-year-old women will live to age 96. We need to plan for a longer retirement period. The more you save and the earlier you save, the better.”
Get Long-Term Care Insurance
Dealing with unexpected life events during retirement requires more than just an emergency fund; it necessitates a comprehensive and adaptable financial plan, according to David Blain, CFA, CEO of BlueSky Wealth Advisors.
“One of the most common unexpected events is significant healthcare costs, including long-term care, which can quickly deplete retirement savings,” Blain said.
To counteract this, he recommended considering long-term care insurance well before these costs may arise. This insurance can dramatically reduce the financial impact of extended medical care, he said.
Prepare For Unexpected Legal Fees
In addition to health issues and long-term care issues, Jared Stern, managing member of Uplift Legal Funding, said that “unforeseen legal matters” are another common issue that can blindside retirees, such as, “[D]isputes over property, wills or even personal injury claims,” which can stretch your finances thin.
“I also suggest establishing a legal contingency fund or investing in legal insurance to prepare for any unforeseen legal expenses,” he suggested.
Stay Abreast of Taxes
Another area that can catch people off guard in retirement are tax issues, Stern said. “Staying informed about potential tax implications and benefits for retirees can also uncover opportunities to save money in the long run. In my view, a multifaceted approach to financial preparedness is key to navigating the complexities of retirement without undue stress.”
Set Up Multiple Income Streams
Another strategy involves the creation of multiple income streams beyond traditional retirement accounts, Blain said.
“Investing in income-producing assets such as real estate or dividend-yielding stocks can provide additional cash flow that is somewhat insulated from the volatility of the stock market,” he explained.
Additionally, he recommended employing a Roth IRA conversion ladder strategy. This is where you shift funds from tax-deferred accounts into tax-free accounts, potentially reducing tax liabilities in retirement when unexpected expenses are more likely to occur.
Have a Plan B, C and D
Most importantly, Blain advises clients to really consider a wide range of outcomes including poor market performance early in retirement when setting up a plan.
“This approach helps identify vulnerabilities in a financial plan, allowing for proactive adjustments. For instance, having a plan B, C or even D means you’re prepared to adjust your withdrawal rate, temporarily reduce discretionary spending or tap into a different income source when faced with unexpected challenges,” Blain said.
This flexible planning ensures that unexpected life events don’t derail your long-term financial security.
Consider the Care of Others
Though you may be worried about your own possible extended care needs in retirement, it’s always possible that you might need to take care of a family member — be that your parents, if they are still alive, or your children, according to Chris Urban, CFP, RICP and founder at Discovery Wealth Planning.
“Helping out family members for whatever reason really, parents or kids and things, if they need financial support for any reason, could be another unexpected event.”
Prepare For Housing Market Changes
Urban said that retirees might also find themselves in the sudden position to have to move, which might involve buying or selling a house.
“The unexpected part could be: ‘What is the housing market like at a particular time when they’re looking to move?’ and ‘What are interest rates doing at any one particular time?’ So maybe you have a grand plan to retire and move somewhere in a year and then all of a sudden home prices in that area double in the next year before you get to moving there,” Urban said.
Additionally, if you’re relying on the passive income from a rental property, that could also be impacted by housing market changes, or simply losing renters.
Having a home equity line of credit (HELOC) open and available if you own your house is another source of funds in an unexpected emergency, Pavone advised.
Create Cash-Bucket Savings
Urban said that rather than having one big emergency fund, it may be more useful to save in what he calls “cash buckets” of both liquid savings and investments.
This is a way of both having cash to pull from but also, he added, “a way to give the rest of your investment in [your] retirement portfolio time to recover should your investments not perform well. Once you get to retirement you can draw from a safer bucket of assets rather than having to sell off from your investment portfolio when the markets are down.”
He said that while everyone’s drawdown strategy will be different, the idea is to tap different accounts at different times.
“So typically earlier in retirement you’re kind of tapping one or both of the taxable brokerage accounts and the traditional pretax IRAs and 401(k)s, but oftentimes we’ll leave Roth IRAs as a separate account in case anything unexpected comes up or for healthcare expenses later in life.”
Ultimately, the best way to be prepared for the unexpected is to expect to be surprised and have backup plans. Talk to a financial advisor to make sure you can address whatever comes.
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